One Guy's Investments: Annual Checkup -- ISRG

I last wrote about Intuitive Surgical (ISRG -- free RT quote) about a month ago when I asked "is the valuation intuitive?", and nothing significant has changed in that time -- even the share price today is roughly where it was then, which is saying something for a skyrocket like ISRG. I have been buying on the way up at roughly $70, $90, and $110 and don't have an overall huge return on paper at this point (with an average cost of $87/share, I'm sitting on about a 40% return at this afternoon's price), but this is certainly one of the few extremely fast growers in my portfolio, right in league with Google and Vertex this year even if I didn't get in early enough to see all that gain. So when does it stop going up? Or does it? I am certainly expecting that at some point in the next few quarters ISRG is going to miss its numbers -- they have clobbered the numbers on the positive side with every release this past year, but with earnings relying so much on a relatively small number of units sold as they build out the installed base of Da Vinci systems, there are bound to be quarters when they sell fewer units than we expect. There will also be a point next year when taxes start to get factored into their earnings, as they are expected to pay taxes for the first time in 2006, though certainly all serious ISRG investors are already expecting this. As soon as any big dip happens, the naysayers will finally be right, and they will crow about the fact that ISRG has reached a saturation point with their surgical robots. I think that's Nonsense. This technology is here to stay and is already dominant in one type of surgery (prostate) and growing in several others -- this is the beginning of robotic surgery, which I expect to revolutionize operating rooms around the country. Check out Dr. Domenico Savatta's blog to see what he's doing with the da Vinci and follow the clinical experience of a trailblazer. When I did my back-of-the-envelope calculations last month I figured we're good for at least a several hundred percent return from here to roughly a $15 billion market cap if the company meets it's intended installed base of 4,500 machines ... but the caveat, beyond the fact that management might be too optimistic, is that I don't know whether that will be in two or three years, or in ten. I already have overweighted in ISRG so I don't plan to add any more shares this year unless the price falls dramatically, but I think ISRG management is actually lowballing the number of installations they might be able to do before they saturate the market, and I think the long term future is extremely bright. I've seen estimated that 2004 saw 24,000 robotic surgeries and 2005 had about 36,000, and experts are predicting that in 2006 that number will double to 70,000. It would take something drastic to get me to sell.

Labels: ISRG